Offering Perks, Lenders Court Colleges' Favor

By JONATHAN D. GLATER

Published: October 24, 2006

One student loan company has invited college and university officials, and their spouses, to attend an education conference -- in the Caribbean this February, all expenses paid. Another pays universities bonuses based on how much their students borrow. Others gave away gifts like iPods at a recent conference for financial aid administrators.

With rising tuition and lagging government aid making private student loans a big and increasingly competitive business, these are some of the ways lenders are courting universities in hopes that they will steer students their way.

Students took out nearly $13.8 billion in private loans in 2004-5, more than 10 times the amount borrowed a decade ago, according to the College Board.

The key to this business is university financial aid offices, which compile lists of ''preferred'' lenders, sometimes as few as two. Students rarely comparison shop and rely on those lists.

Financial aid administrators say they pick lenders with the most competitive terms, not the most appealing giveaways. But some have questioned such arrangements -- and whether students are getting the best deals.

''I don't think you have to be a bona fide ethicist to recognize the potential for a conflict of interest,'' said L. Katharine Harrington, the dean of admissions and financial aid at the University of Southern California, which she said had no financial ties to lenders.

''I'm not in the business of generating outside-fee revenue'' for the university, Ms. Harrington said. ''Nor am I in the business of recommending a particular lender because of what they do for me. Rather, it's because of what they do for the student.''

It is hard to determine how widespread these incentives are. Some of the practices were publicized this summer in newspaper advertisements by MyRichUncle, a relative newcomer to student lending trying to increase its business, that drew criticism from some universities.

Neither universities nor lenders disclose the arrangements, and several loan companies declined in interviews to identify which colleges had them. Congress made it illegal in 1986 for lenders to use inducements to get applicants for federally backed student loans, but the law does not apply to private loans.

Institutions that say they receive payments from lenders include Boston University and Monmouth University in New Jersey. New York University, Fordham University in the Bronx and Purdue University in Indiana have different arrangements in which a lender sets aside a sum for loans to international students and those with poor credit, determined partly by how much other students at the institution borrow.

It is also hard to assess statements by officials that they recommend only those lenders with the most competitive rates, because only one official, out of more than a dozen interviewed, would disclose the average loan rate that students pay. Some said that they did not even track the interest rates students ended up paying.

Companies go to great lengths to build relationships with university officials. Take the invitation to a Four Seasons resort in the Caribbean. The February 2007 event, an ''Education Summit'' planned for a long weekend, is sponsored by EduCap Inc., a nonprofit financial services company that has done billions of dollars' worth of student loan business. This year's ''special invitation'' offers a chance ''to participate in the 2007 Loan to Learn Summit (with your spouse or guest) as an all-expense-paid complimentary guest of EduCap.''

George Pappas, a senior vice president of EduCap, said that the company sponsored a similar weekend last year and that fewer than 100 people attended. Mr. Pappas declined to identify university attendees. He said EduCap paid expenses because ''it would be difficult for them to come if we didn't,'' and it paid for spouses, he said, because ''we're asking people to leave their families over the weekend.''

He said that the purpose of the summit was to remind ''everybody of what the real goal of education is'' and that student loans were not discussed.

A student group has filed a complaint with the Federal Trade Commission saying that the EduCap Loan to Learn program used deceptive marketing to discourage students from applying for federal grants and loans. EduCap calls the accusations ''false and contrary to EduCap's philosophy and business practices of 20 years.''

Other lenders offer cash payments directly to universities.

Education Finance Partners of San Francisco pays several universities such a bonus. The more students borrow, the more money the institution gets. The company declined to say how many such arrangements it had.

At Monmouth, which has taken such payments for about two years, last year's payment was less than $2,000, said Claire M. Alasio, associate vice president for enrollment management. ''Clearly that's not enough money to influence decision-making,'' Ms. Alasio said. She added that the university did not track the interest rates students paid.

Christine W. McGuire, the director of financial assistance at Boston University, which only recently entered such an arrangement with Education Finance Partners, also said payments were ''not enough to make a difference,'' although she declined to say how much they were. Ms. McGuire said officials reviewed loan rates each year when assembling the preferred lender list.